I’m a staff writer covering all things Wall Street and Investing. I have a love hate relationship with the world of finance. I am fascinated by the industry’s power and influence around the globe, and the ingenuity of the people it employs. Not so much a fan of the lack of accountability when the system fails—which it often does: I'm always on the hunt for people and companies to profile.

In Defense Of The Bank Of America Merrill Lynch Deal

You can't attack BofA's decision to acquire Merrill without examining how much pressure the government, including then Treasury Secretary Hank Paulson put on the bank.

Bank of America has engaged in more than its share of nauseating activities but I’m not convinced the purchase of Merrill Lynch was so terrible, or that it warrants a $50 billion class action lawsuit.

A group of shareholders feel differently and in a recent lawsuit they allege that BofA and executives including former CEO Ken Lewis and former CFO Joe Price deliberately deceived shareholders about the dire state of Merrill Lynch’s financials before the deal closed in order to push it through without resistance. In other words, the shareholders say they were kept in the dark about Merrill’s rotting balance sheet and the enormous losses headed its way. (They added up to over $15 billion in the fourth quarter of 2008.)

But what I can’t help but wonder is how anyone could have been surprised at the extent of Merrill’s losses. In the first three quarters of 2008 Merrill had already reported over $14 billion in losses. As Registered Rep. pointed out back in 2008 Merrill was on the verge of death all year– “through the second quarter, Merrill wrote down about $50 billion in the credit crisis. That sum wiped out about 4.5 years of the company’s earnings (not including the three-straight quarterly losses) — or 86 percent of its book value.”

At the time, BofA was stepping in to buy a dying Merrill Lynch, not a healthy one, and that was no secret. If Merrill wasn’t in such a terrible financial condition Ken Lewis wouldn’t have seriously considered invoking a clause back in December 2008 which would have allowed BofA to exit the deal. Lewis tried to invoke the so-called MAC (material adverse change) clause when Merrill’s fourth-quarter losses were skyrocketing from $9 billion to $12 billion at one point.

But it was the government, specifically then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, who convinced (or threatened, depending on who you ask) Lewis from backing out of the deal. According to Lewis, Paulson said in December of 2008 that if BofA backed out then the government would remove its Board and management. So, Ken Lewis could either buy Merrill or the government would end his career.

“[W]e wanted to follow up and he said, ‘I’m going to be very blunt, we’re very supportive on Bank of America and we want to be of help, but’ –as I recall him saying “the government,” but that mayor may not be the case -”does not feel it’s in your best interest for you to call a MAC, and that we feel so strongly,” –I can’t recall if he said “we would remove the board and management if you called it” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.” And the board’s reaction was of “That threat, okay, do it. That would be systemic risk.” “

Cuomo reported that Secretary Paulson corroborated Lewis’s version of the story with Paulson saying that BofA’s backing out of the Merrill deall would “create systemic risk and that Bank of America did not have a legal basis to invoke the MAC.”

So, any case against BofA regarding its acquisition of Merrill should also include the government–particularly Paulson, Bernanke and Tim Geithner. In essence, they are the folks who helped facilitate the deal, and by some accounts, forced it.

I’m not arguing that shareholders didn’t have a right to know the extent of Merrill’s losses but based on the readings of what took place in those weeks leading up close of the deal it seems BofA was on the hook for Merrill no matter what the losses ended up being. (Of course, the government helped BofA out with a nice chunk of bailout money after the losses were officially reported.)

And the sudden firing of BofA general counsel Timothy Mayopoulos is certainly suspicious. Greg Farrell goes into some detail about the incident in his book Crash of the Titans where on one occassion Ken Lewis tells Mayopoulos that “You’re my general counsel. I’m happy with you” and just weeks later Mayopoulos is shown the door without so much as a chance to collect his belongings. (He was replaced by Brian Moynihan.)

Some call Mayopoulos the “man who knew too much” and cite his knowledge of Merrill’s losses as the reason for his sudden termination. From Farrell’s book:

BofA’s then CFO Joe Price “was focused on the magnitude of Merrill’s losses. Along with Greg Curl, who negotiated the Merrill deal, he met with Tim Mayopoulos…to talk about Merrill’s losses through October, as well as its projected losses for the [fourth] quarter, would have to be disclosed to investors prior to the December 5 shareholder vote on the acquisition.

“Five billion dollars is a lot of money,” Mayopoulos said, adding that disclosure might be necessary. He promised Price that he would do some further research.

But I’m not so sure, based on how badly the government wanted to get this deal done, that it would have mattered.

Besides, as awful as those losses were, Merrill isn’t the cancer that’s plaguing Bank of America’s earnings today. Quite the opposite. Last year Bank of America lost $2.2 billion. Without Merrill the loss would have been about $10 billion. Merrill brought in $7.6 billion in profits. In the first half of 2011 mortgage-related losses plagued BofA, but Merrill earned $4.7 billion in net income.

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This article is so TRUE that shareholders who owned the stock at the time would have been able to make a profit well after the purchase if they held the stock and sold it at the high of 19.47. Just lawyers trying to make a buck again on the backs of the current shareholders. What do you call 10 lawyers at the bottom of the lake? a good start LOL

The bigfinancials purposely blew up themselves. Former Goldman/wallstreet exec Henry Paulson got himself/had himself sent to ‘government’ to shepard and finish their take-over or trashing/heisting of the US financial system. And do it on the voters’ wallet. worse than feudalism which people knew it for what it was and fail to discern what it is! and here in River City, USA. It’s not like it’s Thuringia or Florence and the Medici.

Don’t get distracted with the Merrill Lynch+Bank of America deal. They all were a part of what would ‘survive’ including the big foreign financial players but in our collapsing/collapsed US economy. And for that reason Bear Stearns and Lehman were closed/taken down. The biggest were meant to survive while the smaller were given their exits.

Although not seemingly connected to what’s happening and this Merrill Lynch/Bank of America debate, US compliance with the German dominated G20 Agreements means to shrink or collapse the world’s largest economy ie, the US economy.

Thus the bigfinancials, in that they’re the world’s financial arteries, ours which want to have global access and presense ie out of hubris ( the Europeans are the same), but these bigFinancials then in order to collapse the US and in effect also the global economy, crafted and pulled off their Enronesque self-destruction/blowing up themselves.

This included obtaining Gramm Leach Bliley and Commodity Futures Modernization Act legislation which let banks and insurance merge, legitimized OTC derivatives contracts defined as ‘insurance’ and then under CFMA2000 legitimized to ‘trade’ these ‘over the counter’ but without ANY regulationm, supervision or oversight.

It meant that management at the bigfinancials could write /plume these contracts and now also TRADE them, with the trading of them sort of establishing some sort of value that hedge accounting (FAS133) already had permitted for valuation and accounting purposes for those enterprises using financial ‘hedging’ ie various sorts of financial contractual offsets against or supporting their other assets and contracts as in like portfolio management. This is when there are a number of different assets which are investments all which have their individual risk, maturing and cash flow characterists. The different assets in the investment portfolio are chosen given their different characterists to yield greater than others in any sort of financial market environment than if the same investments or asset types had been chosen and would have to ‘perform’ in the eventual financial market environment and economy.

OTC derivates contracts were proliforated on purpose to inflate these balance sheets but when the financial markets were correcting, the ‘mark to market’ for the quarterly reporting purposes were shadowing the markets correcting downward. When the losses were run thru the income statements of the big financials that had to mark to market (“Fair value”) their balance sheets, what had been record breaking ‘earnings’ then turned into huge holes run thru their income statements to eat the ‘retained’ earnings in the Shareholders’ Equity sections of the balance sheets of the bigfinancials.

This gives/gave us 2008 and the bailout by the US government of the world financial system. So on behalf of the German dominated G20 agreements, the world financial system was collapsed and the power of which was more concentrated in the hands of a very few.

Meanwhile management got to pay itself huge amounts of money and from the years 2005-2007 appeared to be making record breaking earnings based on the inflated balance sheets full of OTC derivatives contracts that were valued shadowing the upward moving financial markets. This is a sort of hall of mirrors/smoke and mirrors (pretense of higher earnings drives the markets while the market values enable bank traders to have upward moving markets to mark their books/balance sheet-asset values higher and borrow at low interest rates a la Fed/Greenspan!) and that’s key too because that also tells you who/what else was involved in the 20 year craft of yet more control of/over the financial system.

Keep in mind that while at Goldman, in 2004 Paulson got the “net capital rule” from Bill Donaldson while Mr Donaldson was its chairman. That was so that the US bigfinancials could inflate their balance sheets to the sizes of the Europeans and the Japanese but without having to acquire and/or engage in more concentrations of power spurring more Too Big To Fail issues.

And our country and financial system run differently and have accountability in greater ways than those of the Japanese and Europeans. The delusion that our systems are ‘similar’ is a sucker punch that gets us to where the US with the Bushes after or with German reunification but in general with conflicted international alliances gets us to the eroded financial and commercial condition today in which we are.

Defending the Merrill/Bank of America deal misses what really happened, what had been happening and what still is happening. The Fed’s current QE phase and the SIFI definitions under Dodd Frank frame the next Merrill Bank America – esque iteration. Different names, just like those names were different from the earlier iterations after 1982 thrift meltdown era Garn St Germaine legislation, 1989 FIRREA or 1991 FIDCIA legislation iterations and associated mergers after those. This barely scratches the surface on a huge body of bank/financial commerce who-done-it history that isnt often debated correctly and/or by those who understand the forest for the trees.